A Transportation Department administrative law judge recommended approval yesterday of Northwest Airlines' proposed $884 million merger with Republic Airlines, the biggest deal in U.S. airline history.

The recommendation from Judge Ronnie A. Yoder came despite the opposition of the Justice Department's Antitrust Division, which argued that the merger would substantially reduce competition in nonstop flights serving Minneapolis-St. Paul, the cities where Northwest and Republic are based.

Yoder said, in effect, that the total freedom airlines now have to begin or withdraw service from cities makes it technically impossible to argue that there is no competition.

"Deregulation and the possibility of open entry by an unending and unascertainable stream of potential competitors in any market would appear, in fact, to render the burden of proof on a merger opponent almost insurmountable," he wrote.

His recommendation goes to Transportation Secretary Elizabeth Hanford Dole, who is expected to issue a decision by July 31. Because international routes are involved, the final decision is President Reagan's, but he can overturn the secretary only for reasons of national defense or foreign policy.

Northwest spokesman Matt Gonring said, "We're very pleased. The approval of the merger by the administrative law judge is a very positive and significant step in the process." If Yoder's recommendation becomes the final word, Northwest-Republic will be the nation's third-largest airline, behind United and American, and the new airline will have the muscle it needs to compete strongly against United in the Pacific.

For years Northwest's major U.S. competition came from Pan American World Airways, but when United purchased Pan Am's Pacific Division, Northwest was left with the options of trying to compete against an airline with a much larger domestic network or of trying to respond in kind.

Republic is itself a result of deregulation, the merger of three smaller regional carriers -- Southern, North Central and Hughes Air West. The major anticompetitive question about Northwest merging with Republic comes in the fact that both carriers have hubs in Minneapolis-St. Paul and Detroit.

Justice had argued in a recent filing that "there are 26 markets where Northwest and Republic currently provide a large share of the competing nonstop service. In 19 of these markets, the merger would consolidate the only two airlines providing nonstop service, thereby eliminating all present competition."

While recommending the merger, Yoder said special labor protections should be imposed to protect the rights of Northwest-Republic employes. He declined to recommend an exemption from the requirement for presidential review in international route cases.

Gonring said, "We remain opposed to the institution of labor protective provisions, because we believe they are unnecessary and a matter for collective bargaining, not government intervention."

Dole's department has not looked fondly on labor protections. An exemption from presidential review would speed the effective date of the merger.